The talks are at a preliminary stage and nothing has been
decided yet, said the people, who asked not to be identified
because the talks are private. The stake sale could lead the
Peugeot family, which currently owns 25.5 percent of the shares,
to lose control of the French company, the people said.

Peugeot, which reported a first-half operating loss in its
automotive unit of 510 million euros ($681 million), is losing
market share in Europe to Volkswagen AG, the continent’s largest
automaker. To push expansion elsewhere, Paris-based Peugeot
already has a partnership with Dongfeng. They opened their third
joint assembly plant in July to produce four models in China.

“Their structural shortcoming is: ‘we don’t sell out of
Europe,’” said Erich Hauser, a London-based analyst at
International Strategy & Investment Group who recommends buying
Peugeot shares. “If you’re the owner of the business or the
CEO, and if you think about how to stabilize the business in the
next 10 years, you need to get into emerging markets and get a
partner.”

Stock Rises

Peugeot gained 1 percent to 12.44 euros at the close in
Paris. The stock has more than doubled this year, valuing the
company at 4.41 billion euros.

“We shouldn’t be resistant to change, especially given the
difficult situation we are in,” Serge Maffi, leader of the GSEA
union at Peugeot, said by phone. “Things have changed in the
car industry, and we need to adapt to the new environment.”

Chief Executive Officer Philippe Varin has pledged to cut
the manufacturer’s cash-consumption rate by 50 percent in 2013
after burning through 3 billion euros last year. He plans to
eliminate 11,200 jobs in France by 2015 and close a car plant in
Aulnay, on the outskirts of Paris.

GM’s Holding

The French manufacturer also has a partnership with
Detroit-based General Motors Co. to develop vehicles and procure
parts together to reduce costs.

GM, which owns the Opel and Vauxhall brands in Europe and
is struggling to become profitable in the region, bought a 7
percent stake in Peugeot last year as part of the alliance. It
now ranks second as an investor in the French company, after the
founding family.

“If we seal another partnership just two years after the
one announced with GM, we’ll have many questions to ask
management about it,” Pierre Contesse, FO union deputy leader
at Peugeot, said in a phone interview.

Peugeot and GM have started their first joint purchasing
negotiations, the French company said earlier this month.

The agreement with Dongfeng “could trigger a divorce from
Opel and stop what has been done so far,” Gaetan Toulemonde, an
analyst at Deutsche Bank, said in a research report today.

Johan Willems, a GM spokesman, declined to comment in an e-mail today.

Bank Advisers

Peugeot hired two banks to examine options to deepen ties
with Dongfeng, Les Echos said on its website late yesterday in a
report on the possible stake sale to the Chinese company.

The French carmaker will have four factories in China by
the end of year. The first three, under the venture with
Dongfeng, are in Wuhan, capital of the central province of
Hubei. The most recent plant was inaugurated in July and will
increase the company’s annual production capacity in China by
two-thirds to 750,000 vehicles by the end of 2015.

A separate joint venture with Chang’An Automobile Group is
scheduled to open Peugeot’s fourth Chinese factory in the
southern city of Shenzhen at the end of the month. The first
vehicle produced at the plant will be the Citroen brand’s DS5
executive compact.

Peugeot has a target of reaching a 5 percent market share
in China by 2015. The strategy to win customers includes
starting sales of the new Peugeot 308 hatchback and 2008
crossover in the country next year. First-half deliveries with
Dongfeng rose 33 percent to nearly 277,000 vehicles, Peugeot
said in July.